Farm Income Decline Forecast

WASHINGTON, D.C -- U.S. net farm income could drop more than $9 billion in the next two years, taking a triple hit from reduced government payments, rising production costs, and lower prices for milk and hogs, according to a report prepared by the Food and Agricultural Policy Research Institute (FAPRI) for the U.S. Congress.

The annual 10-year baseline projections, used in legislative policy making, show net farm income declining from the present $45.4 billion to $36.3 billion in 2002. That is a decline from $55 billion net farm income in 1996, when world grain supplies were low and commodity prices were high.

Much of the drop in income occurs because projections are based on continuation of current farm law, but do not assume the supplemental payments that Washington has made to producers each of the last three years.

FAPRI projects crop prices in the near term to average 20 percent below the 1995-99 levels. The brightest spot in the outlook is a continued increase in cattle prices through 2003.

Leading the increased production costs are rising prices for natural gas used in manufacture of nitrogen fertilizer, essential for corn production. Expenses for fuel, fertilizer and other manufactured inputs increased more than 10 percent in 2000.

"Expenses are expected to show another significant increase in 2001 due to higher fertilizer prices," the report said.

On the income side, plentiful world supplies of crops keep prices under pressure.

The baseline projections are based on assumptions that include normal weather, continuation of present farm programs, and that government loan rates continue at their maximum levels through the baseline period. The report also assumes that the United States and world economies grow in line with forecasts by Standard and Poor's DRI.

The report projects that the U.S. economy, after expanding 5 percent in 2000, is expected to slow in 2001. Over the baseline, growth in the real Gross Domestic Product averages 3.5 percent per year. World growth is expected to range between 3 and 4 percent per year.

The FAPRI baseline is prepared by agricultural economists at the University of Missouri-Columbia and Iowa State University in collaboration with economists from other Universities.

"The projections represent our best estimates of what the world would look like under a very specific set of assumptions," said Robert Young, co-director of MU FAPRI, who was chief briefing spokesperson in the presentations to the agricultural committees of the U.S. Senate and House of Representatives.

"The principal purpose of a baseline is not to predict the future, but to serve as a benchmark for analyzing alternative policies," Young said.

After the gloomy outlook for the start of the coming decade, the FAPRI baseline projects net farm income beginning to recover after 2002, when it reaches the lowest level in a decade. By 2010, it climbs back to $45 billion, well below previous peaks.

Other projections in this baseline are that direct government payments to producers will fall by more than half between 2000 and 2002.

"This is in keeping with the assumption that Congress does not pass another supplemental assistance package in 2001," Young said. After a prolonged weakness, grain and oilseed prices recover slowly over the decade in response to strengthening demand in a growing world economy, according to the baseline.

For 2001, projections show increased U.S. acreage for soybeans, cotton and rice, with reduced area in wheat and corn. FAPRI projects corn planted acreage will drop 1.5 million acres, to 78 million. Much of that acreage will shift to soybeans, increasing planted acres to 76 million.

Increasing corn production costs and the relative attractiveness of the soybean loan rate contribute to the swing from corn to soybeans. The price outlook for grains improves slightly better than for soybeans in 2001, in part because of the projected increased supply of beans.

Season average price for corn in 2001 is projected at $2.05, up from $1.87 last year. Soybeans prices for the 2001/02 marketing year are projected at $4.53 per bushel, down from the average farm price of $4.75 in 2000.

Hog and cattle prices will move in cycles, although altered from the pace of past cycles. The price for fed steers is expected to peak at $76.64 (Nebraska direct) in 2003, but then will begin to fade as the nation's cowherd rebuilds.

Hog producers face prices that rival the bottom seen in 1998, as they head toward producing more hogs than packing plants can slaughter. Overall, the swine breeding-herd will continue to decline throughout the baseline. However, the cutback in sows is more than offset by increased production per sow, through improved technology.

In dairy, with the assumed removal of price supports, the average price for "all milk" falls to $11.78 per hundredweight in 2002. As demand for cheese and fluid milk increases through the decade, prices recover to $13.35 by 2010.